Question

Solve using excel

SHOES "R" US has bonds on their balance sheet in the amount of $5,000,000 in book value. Those bonds mature

in six years. The Company is thinking of buying the bonds back now because yields are 3% while their bond pays 7%

annually.

1. What should be the price in the market of 1 SHOES "R" US bond today?

2. How much money would SHOES "R" US need to raise to return the entire amount of bonds outstanding?

Answer 1

Price of the bond is the present value of all the future cash flows discounted at the yield to maturity

Price of the bond = Face value / ( 1 + yield to maturity)^n + coupon [ 1 - ( 1 + r ) ^-n] / r

where n = years to maturity

r = yield to maturity

Price = 1000 / 1.03^6 + 70 * [ 1 - 1.03^-6] / 0.03

= 1000 / 1.194052297 + 70 *( 1 - 1/1.03^6 ) / 0.03

= 837.48 + 70 ( 1 - 1 / 1.194052297) / 0.03

= 837.48 + 70* 5.417191467

= $1216.68

Amount of money would SHOES "R" US need to raise to return the entire amount of bonds outstanding

= 5000000/ 1000 * 1216.68

= $6,083,400